Risk Strategies to Help Credit Unions Level Up in a Competitive Auto Finance Game
March 29, 2023
Originally published in CU Times, March 17, 2023.
By Jovilyn Herrick, Senior Director, Client Solutions & Christopher Coleman, Founder of WithClutch
It doesn’t take an economist to see that car buyers are in a tricky financial spot. Purchase prices are up, and as a result, loan terms have been extended to accommodate inflation-impaired budgets.
Many lenders, and especially purpose-driven ones, are rightly concerned about pushing borrowers into a negative equity position. But that worry need not hinder portfolio growth. Despite the economics, auto loan demand is healthy. And, credit unions are doing great in terms of meeting that demand, having attained the largest share of vehicle financing for the first time ever late last year. It’s no wonder. With lower rates, more flexible underwriting, excellent dealer relationships and the people-over-profit foundation, credit unions are tough competitors in the battle for auto loan business. This makes sense, as “trust in the lender” was ranked more important than an easy loan application process by the Gen Z buyers recently surveyed by Cox Automotive.
Right Person. Right Amount. Right Credit Profile.
While things are looking up for credit union competitors, no one believes that winning the business of today’s car buyer is easy. It requires a digital mindset with a healthy fintech stack. That’s because online applications, speedy loan approvals and wicked-fast time-to-funding are now table stakes in the auto lending game. Indeed, McKinsey named “investing in digital, analytics and automation” as one of six initiatives to boost auto financing profitability.
Along with digital transformation and a taller tech stack comes additional risk. To stay on the path to market dominance, credit unions will need to confidently stare down that risk with strategies that confirm they have the right person, right amount and right credit profile.
With the number of data breaches on a steady rise, incidents of synthetic identity fraud are presenting a real challenge for lenders working to digitize the borrower experience.
Becoming digitally mature as a lender presents something of a double-edged sword in terms of fraud. On the one hand, impersonation is much easier to pull off online. On the other, most ID authentication innovation is focused on the digital channel. The fact of the matter is that accelerating the development of an end-to-end digital lending process is the best way to take advantage of most emerging fraud prevention solutions.
When a borrower applies online, digital lenders have an easier time applying increased levels of scrutiny through methods such as data enrichment and AI fraud mitigation solutions. The promise of even greater risk mitigation is on the horizon with the emergence of things like digital driver’s licenses and even car title transfers via blockchain.
In an analog world, it was not unusual for a loan officer to perform a walk-around of a member’s purchase in the credit union parking lot. Although far from convenient, it did allow the credit union to verify what exactly it was promising to underwrite.
Today, you’d be hard-pressed to find a consumer willing to jump through such hoops, especially when an increasing number of people are buying cars sight-unseen through online marketplaces. Carvana alone sold more than 412,000 vehicles in 2022.
Fortunately, there has been a recent democratization of tools to properly value a car in the digital realm. Credit unions can affordably integrate this technology to balance convenience with the need for accurate collateral assessments. The solutions act as virtual window stickers, providing up-to-date MSRP and features pricing, greatly reducing the risks of over-extending credit based on buyer- or seller-inflated values.
Right Credit Profile:
As interest rates rise, credit unions have an even greater market opportunity to serve the underserved borrower. While mainstream lenders chase business from those with the highest credit scores, non-profit lenders can bring meaningful financial services to traditionally overlooked consumers.
To expand into new markets more effectively, however, credit unions may need to redesign their account opening processes. This is not necessarily the heavy lift it may seem. Lending teams can collaborate with their compliance colleagues to include, for instance, the acceptance of non-traditional forms of identification and identification numbers, such as ITINs, in their policies and procedures.
It’s important to keep in mind that underserved borrowers may have less experience with mainstream financial services and therefore may need an extra layer of care. They also may be engaging through a digital channel. According to Pew Research Center, the percentage of Americans with lower incomes who rely on their smartphones for going online has doubled between 2013 and 2021.
While there may be a tendency to think of digital engagement as lacking enough of the human touch to provide extra care, the opposite can be true. In fact, some digital lending platforms are actually better equipped to deploy consumer protection best practices, such as soft credit pulls, simplified disclosures and more accurate, up-front rate quotes and repayment terms.
Creating Members for Life
Auto lending, like most personal financing channels, requires both short- and long-term mindsets. The lenders that are best positioned for growth are those that understand the cyclical nature of the industry. They play the short-term game of earning deposits and making loans. Yet they also know how to train in the off season, making sound investments in meaningful technology, equipping their loan officers with digital skillsets and integrating agile risk-mitigation strategies.
Although the specters of runaway inflation, aggressive fintech competitors and a shaky economy may tempt credit unions to take a beat on auto lending, the opportunity to win new members is now. As rates eventually decrease, so too will the average credit union’s competitive strength. Balancing short- and long-game priorities, credit unions can take auto lending to the next level without too much risk, providing the kind of seamless, secure and modern experiences that create members for life.
Note: ViClarity and WithClutch began partnering in 2022, with ViClarity providing compliance support to WithClutch as they work to digitally transform credit unions.